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When the Social Safety Net Is a Smart Investment

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By Michael Rainey

August 6, 2019

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Social welfare programs in the U.S. are sometimes seen as expenses that lawmakers should attempt to minimize, but a new paper from two economists at Harvard University shows that some programs produce more money for the government over time than they cost initially.

The paper’s authors, Nathaniel Hendren and Ben Sprung-Keyser, analyzed 133 U.S. policy changes over the last 50 years, including the creation of Medicare and the introduction of food stamps, and found a pattern: Programs that benefit low-income children more than pay for themselves in the long run because they lift incomes and decrease dependence on public assistance.

“The results show there’s a potential to get really high returns when you’re focusing on kids,” said Professor Hendren.

A Leading Example: Medicaid Expansion

The authors found that the expansion of Medicaid between 1979 and 1992 to cover more pregnant women and children paid off over time. The Wall Street Journal’s Soo Oh and Janet Adamy summed up the economists’ analysis of the change in policy:

Medicaid expansion cost states $3,473 per mother on average.

Additionally, taxes paid fell because some mothers dropped out of the workforce, with losses estimated at $564 per mother who stopped working.

But as the children grew older, they experienced lower rates of hospitalization and ill health, saving the government $530 per child.

More children went to college, initially costing the government $371 per child more in financial aid.

But better health and education boosted the children’s eventual earnings by more than 11% on average.

The government’s costs of medical care and education were paid back by the time the recipients were in their 30s, and there was a surplus of $7,014 per child in the long run.

Laura Wherry, a health-policy researcher at UCLA, told The Wall Street Journal, “I think [the study] clearly shows that government programs that are targeted to low-income children are a smart investment.” Along the same lines, the authors write in their conclusion, “From a taxpayer perspective, these expenditures on children are investments, rather than just transfers.”

Not All Welfare Programs Have a Financial Payoff

While some government programs clearly pay for themselves, others are closer to break even, and some offer no positive financial returns – though they still may be the right thing to do from a social and moral perspective. In general, spending on adults tends to have a lower payoff, the authors found, although programs that have spillover effects that help children, such as funding for families to move to less impoverished neighborhoods, can be worthwhile.

Unemployment and disability insurance are among the programs that were found to offer no financial return for the government. The simple reason is that a significant percentage of adults who claim these benefits drop out of the workforce, eliminating the potential to pay the government back through taxes.

Other programs that lack a financial payoff for the government include job training and college aid for adults. These programs may fail to enhance human capital, the authors said, and therefore do not generate the returns associated with higher wages and sustained employment.